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How CSRS and FERS Survivor Annuities Are Taxed
A recent article explains how CSRS and FERS non-disability retirement annuities are taxed by the federal government, using the IRS Simplified Method. It clarifies which portion of a CSRS or FERS retirement annuity remains non-taxable and when the annuity becomes fully taxable. This in-depth discussion covers the tax treatment of survivor annuities under CSRS and FERS as well.
This piece focuses on two main scenarios for survivor annuities (full or partial taxation):
- A retired employee dies during retirement before the retirement funds in CSRS and/or FERS have been fully paid back.
- A CSRS- or FERS-covered employee dies while still in service, before beginning to receive an annuity.
It also explains survivor benefits for eligible children of deceased employees or annuitants. Eligible children include unmarried minors under 18, and dependents aged 18–22 who are full-time college students. Disabled children who became disabled before turning 18 qualify for survivor benefits that continue indefinitely unless the child marries. Unlike spouse or insurable-interest survivor elections—which permanently reduce the retiree’s annuity to fund the survivor benefit—there is no reduction to the retiree’s annuity to fund a children’s survivor benefit. However, a portion of a children’s survivor annuity is still federally taxable.
Scenario 1: Retired Employee Dies Before All Contributions Are Recovered
As noted in the prior article, the tax-free portion of a CSRS or FERS annuity is determined using the IRS Simplified Method and remains fixed, even if the annuity is increased by cost-of-living adjustments (COLAs). If a survivor annuity is paid to a surviving spouse only, the same tax-free monthly amount that applied to the retiree’s annuity continues for the spouse until the deceased employee’s contributions are fully paid back.
Example: A CSRS employee retires in 2016, dies within a year, and leaves a survivor annuity to the spouse. The retiree’s monthly annuity might be $4,000 with a tax-free portion of $300 under the Simplified Method. The survivor receives $2,500 monthly in 2017, of which $300 is a return of the deceased employee’s contributions and thus not taxable. This tax-free amount continues for the life of the survivor annuity, until the total contributions are paid back.
Note: OPM’s Retirement Office issues CSA and CSF forms but does not clearly communicate the tax-free portion of a survivor annuity on the survivor’s tax documents. It’s important for annuitants to inform survivors of the tax-free portion so the same tax-free amount can be applied consistently.
Scenario 2: Employee Dies in Service and Survivor Annuity Starts Immediately
If an employee dies while in service and a survivor annuity is provided, the survivor begins the month after death, provided the employee had at least 10 years of federal service. The tax-free portion of the survivor annuity is the deceased employee’s cost in the retirement plan, shown on the survivor’s CSF 1099-R as “Total Employee Contributions.” The Simplified Method then splits each monthly payment into a tax-free portion (return of the employee’s cost) and a taxable portion (the remainder). The tax-free portion remains constant even if the annuity is increased by COLAs.
Scenario 3: Surviving Spouse with No Children Receiving Children’s Survivor Benefits
For surviving spouses with no children, the Simplified Method calculates the tax-free portion by dividing the employee’s total contributions (Box 8 on the CSF 1099-R) by the survivor’s life expectancy in the year of death, as shown in the Simplified Method Worksheet. Example: A widow aged 42 begins receiving a $1,800 monthly FERS survivor annuity after her husband’s death. If the husband contributed $7,800 during 15 years of service, the tax-free portion is $7,800 divided by 360, which equals $22. So, $22 of the $1,800 monthly survivor annuity is tax-free.
Scenario 4: Surviving Spouse with Children Receiving Children’s Survivor Benefits
When a survivor annuity includes both a spouse’s life annuity and children’s temporary annuities, the Simplified Method requires allocating the monthly tax-free exclusion among all beneficiaries. The total monthly exclusion is calculated as if only the spouse received the annuity, then allocated among survivors proportionally. For example, if a surviving spouse has a $1,800 monthly annuity and a child receives $511 monthly, the total exclusion of $22 is divided according to each beneficiary’s share of the total monthly benefit. In Donna’s case, the child’s share would be calculated as: $22 x (child’s $511 / total monthly survivor benefits). This yields a tax-free portion of approximately $4.86 for the child and $17.14 for the surviving parent.
A child’s survivor annuity typically ends at age 18, or at 22 if the child is a full-time college student. When a child’s temporary annuity ends, the overall monthly exclusion simply reallocates among the remaining survivors. If the surviving spouse remains the sole recipient, they retain the entire monthly exclusion.
Additional Resources
For more information about CSRS and FERS annuities and survivor annuities, you can consult IRS Publication 721 (Tax Guide to U.S. Civil Service Retirement Benefits).
About the Author
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter, and Enrolled Agent. He practices in Silver Spring, MD, and provides tax planning, federal employee benefits, retirement, and insurance consulting through EZ Accounting and Financial Services.
Disclaimer: This content is intended for general information only. It reflects sources considered reliable but does not constitute legal, accounting, or professional advice. For specific guidance, consult a qualified professional.
